The current conceptual distinction between liabilities and equity defines liabil

Question

The current conceptual distinction between liabilities and equity defines liabilities independenntly of assets and equity, with equitiy defined as a residual amount. the present proliferation of financial instruments that combine features of both debt and equity and the difficulty of drawing a distinction have led many to conclude that the present two-category distinction between liabilities and equity should be eliminated. Two opposing viewpoints are:

view 1:The distiction should be maintained

view 2: The distinction should be eliminated and financial instruments should instead be reported in accordance with the priority of their claims to enterprise assets.

One type of security that often is mentioned in the debate is convertible bonds. Although stock in many ways, such a security also obligated the issuer to transfer assets at a specified price and redemption date. Thus it also has features of debt. in considering this question, focus on conceptual issues regarding the practicable and theoretically treatment, unconstrained by GAAP.

Required:

1) Which view do you favor? Develop a list of arguments in support of your view?

Explanation / Answer

one reason for eliminating or downplaying the distinction between liabilities and equity is because the line between liabilities and equity has outlived its usefulness and attempts to sharpen it are likely to fail. Another reason is that attempting to resolve the issue by adding more elements would likely compound the problem, given the proliferation of new financial instruments that combine features of both debt and equity, and thereby blur the line between liabilities and equity. For those reasons, a different approach is needed, one that would combine liabilities and equity into a single element. present sharp distinction between liabilities and equity has become less relevant in the current economic environment due to the proliferation of innovative financial instruments that have characteristics of both liabilities and equity. certain practical problems arise in eliminating the liability and equity distinction, particularly when standards make the measurement of a claim dependant on that distinction. However, the Boards are free to amend their measurement standards to make needed terminology changes in ways that either retain the existing initial measurements or change them if they determine that improvement s are needed.

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